Monetary Easing in China? Don’t Hold Your Breath

Some analysts have been betting on the country’s central bank to ease monetary policy to help prop up the world’s second-largest economy.

Don’t hold your breath, says one China economist.

Peng Wensheng, chief economist at China International Capital Corp., one of the country’s largest brokerages, said the People’s Bank of China has very limited room to relax credit at the moment because of rapid loan growth at Chinese banks in the past few years.

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“Since the global financial crisis, the central bank’s balance sheet has declined while the commercial banks’ balance sheets have expanded significantly,” Mr. Peng said on Tuesday at an economic forum in Shanghai held by the Institute of International Finance. He said the opposite has occurred in developed countries such as the U.S. — the Federal Reserve’s balance sheet has expanded significantly since the 2008 crisis while assets held by the U.S. commercial banks have plunged.

The upshot: “We shouldn’t have too big a hope for monetary easing until we see a significant slowdown in Chinese banks’ asset expansion,” Mr. Peng said.

Calls for the central bank to ease credit are increasing inside China. Some Chinese corporate executives in recent months have been complaining that banks in the country have become increasingly reluctant to lend because of their shrinking deposit base and rising bad-loan ratios.

“Last year, we were able to get loans at a pretty big discount to the benchmark rate, but this year, we have to pay a premium,” said a finance executive at a state-owned power company in Shanghai.

“It’s a night-and-day difference,” the executive said. “Banks are pretty short of funds right now.”

But Chinese authorities so far have been unwilling to open the lending spigot for fears of worsening the country’s debt woes. In the past few years, credit in China has grown at a similar pace as that in countries including the U.S., Japan and South Korea before those countries fell into recession. Beijing in recent months has been trying to rein in runaway debt that many economists say threatens China’s financial stability.

Still, some economists expect the Chinese government to soon switch gears — especially if the housing market, a key engine for China’s economic growth, slumps further.

Wang Tao, chief China economist at UBS, said at the Shanghai forum that Being could move to loosen monetary policy by giving banks greater flexibility to lend more. That could be triggered by a sustained downturn in the property market, which could lead to a “sizable risk” that China’s GDP growth drops to 5% next year, she said.

“The government has the policy tools to mitigate the downturn,” Ms. Wang said.

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